Mutual Funds For Beginners: Everything You Need To Know

Mutual funds for beginners
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A mutual fund is a collective investment instrument, which gathers a pooled amount of money from multiple investors. This collected sum is invested in different financial instruments like stocks, commodities, bonds, and other securities. Mutual funds are managed by professional fund managers, who come with years of experience in managing investment portfolios. This gives you, the investor, access to professionally managed portfolios without having to learn about market analysis and investment strategies. With easier access to debt and equity markets at lower transaction costs, investors can also reap the benefits of diversification and liquidity with mutual funds.

Types of mutual funds

If you are looking to invest in mutual funds, you can tailor your investments, based on your risk appetite and financial goals. Your choice of mutual funds can be based on the asset class, returns offered, and the investment objectives and goals you aim to attain

The asset class or mix that a mutual fund invests in, plays a key role in determining the risk levels, rate of return, and investment objectives. Thus, mutual funds are broadly classified based on these asset classes they invest in.

These are some of the different types of mutual funds.

Equity mutual funds

In case of equity mutual funds, 65% or more assets are allocated to equity markets, or shares of various companies. However, this allocation can be spread between various sectors like banking, consumer durables, consumer non-durables, etc. With a diversified portfolio and exposure to strong equity shares, equity funds enable you to earn higher returns. However, there is a certain degree of risk involved with these mutual funds, as their performance is dependent on market movements.

Investing in equity mutual funds may be chosen if you are looking to gain good exposure to stock markets and have a healthy risk appetite.

Debt mutual funds

Debt mutual funds generate returns by investing your money in securities that offer fixed returns, such as government bonds, commercial papers, treasury bills or any other money market instruments. These instruments have a fixed maturity date and interest rate, which makes them safer than market-linked equity investments. However, there may be a risk of default or delay by borrowers.

There are different types of debt mutual funds such as liquid funds, money market funds, corporate bond funds, gilt funds and more. Usually, there is a credit rating for every debt security, based on which you can ascertain the safety and quality of your intended investment. When compared to equity mutual funds, these funds offer a lower risk profile and ideal if you are not willing to take on too much risk with your investments.

Hybrid mutual funds

Hybrid mutual funds invest in more than one asset class, depending on the investment objective of the fund. These investments may include equity, debt and/or other asset classes. With an asset combination of fixed-income and market-linked securities, hybrid mutual funds invest in different asset classes to diversify your portfolio, thereby mitigating the risk involved.

Some examples of hybrid mutual funds are equity-oriented mutual funds, debt-oriented mutual funds, balance funds, monthly income plans, and arbitrage funds. These funds answer to your investment need if you wish to leverage both the higher risk equity markets and the lower risk debt markets.

There are many other types of mutual funds which you can invest in. We will be discussing those in another post. Now that you know the basic types of mutual funds let us talk about how you can invest in them.

How to invest in mutual funds?

Figuring out the most efficient way of investing is just as important as understanding where to invest your hard-earned money. You can choose to invest a lumpsum amount, or through a Systematic Investment Plan (SIP).

Investing via a lumpsum happens, as the name suggests, when you pay the entire amount, you want to invest, in one go. Lumpsum investments are a good idea if you have a sum of money you have saved up over time or money you may get as a bonus, inheritance, one-time payments, etc.

However, if you do not have the money to invest ready, you can choose to invest via an SIP. An SIP, or a Systematic Investment Plan, is some that allows you to invest a fixed amount of money into your chosen mutual fund at regular intervals. If you are just getting started with your mutual fund investments, an SIP can be a great choice for you as it not only helps you budget your money but also inculcates investment discipline.

As a versatile investment option, mutual funds cater to the needs of different investors and help them grow their savings. By choosing the right avenue and the best mutual funds suited for your investment needs, you can ensure steady capital appreciation to fulfil your goals.